A general shock pervaded the mortgage-backed market and dealer screens remained virtually empty last Wednesday after the Federal Reserve cut interest rates by 50 basis points, sparking the possibility that the current Refi "pickup" might transform into a full-blown Refi wave.

MBS analysts were almost unanimous that the rate cut is a very good thing for mortgages, mainly because the "carry" - the difference in yield between bond yields and borrowing costs - is increasing, meaning that premium bonds would benefit the most. The improvement in carry is mostly due to a decline in funding costs spurred on by the interest rate cuts.

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